Take Pension now or Wait till NRD Age 60?

Notepad_Phil

philng said:

Was hoping to get a response and any help on this as to what the GMP bit means & any implications?

That's potentially a big question, maybe take a look at https://techzone.abrdn.com/public/pensions/Tech-guide-guaranteed-min-pen and https://www.barnett-waddingham.co.uk/comment-insight/blog/what-is-a-gmp/ 

The general effect is that the GMP portion of your salary could be indexed less than the 5% max that you mentioned in your original post (the statutory is only 3% for post 88 GMP and 0% for pre 88 GMP, but schemes can change it) - if it were me then I would double check that all portions of the pension are covered by the 5% limit by thoroughly reading the scheme documentation.

If it definitely is 5% for all then it has no practical impact on any increases you'll receive, but if the GMP portions aren't covered then your increases will be less than you might have expected.

green_man

Expotter said:

From my research I'd suggest you also take this into account

"Whilst pension increases in payment are often capped on an annual basis, the revaluation of deferred pensions is usually capped over the whole period, typically at 5%pa. In practice given historic low levels of inflation, we’d need some pretty stonking inflation before we get to the point where average inflation over several years exceeds this 5%pa cap. Trustees need to think carefully about how this affects – for example – the reductions that they apply on early retirement. Typically, on early retirement, a scheme might reduce a pension by 3-4%pa, to reflect the fact that it will be paid for longer. But now early retirement means that a member will lose out on a few years’ inflationary revaluation. In the next couple of years that could easily average 6%pa. In most cases, pension increases in payment will be anticipated to be rather lower than that, which means that the typical early retirement reductions applied today may in practice be far too penal. Indeed, for schemes with low levels of pension increases once in payment, the only actuarially “fair” early retirement reduction might be none at all.

Not only is inflation increasing, but so is inflation volatility. This causes problems of its own. The way most schemes revalue deferred pensions on retirement is a good example of this. Typically, a revaluation factor will be calculated based on the number of complete years since a member ceased building up their pension. This inevitably produces cliff-edge issues in the way pension is calculated – drawing your pension with effect from the anniversary of the day you left work (or your pension stopped accruing) usually gives a higher benefit than drawing your pension the day before. But in 2022 there are some particularly extreme cases – for example, 13 is most definitely an unlucky number. If you draw your pension 13 years after it stopped accruing, you’ll get 5% less than if you wait until you’ve clocked up 14 years; and, bizarrely, 2% less than if you draw your pension after 12 years. There’s likely to be another big cliff-edge lurking at the end of this year – current high levels of inflation are not reflected in the revaluation factors used in 2022 but will kick in from 1 January 2023 – so members who can hold off drawing their pension until 2023 may well be much better off. Whilst these details may feel like the sort of minutiae that go over the heads of most members, financial advisers are becoming increasingly astute at making their clients aware of the importance of timing in many pension decisions."

Source: broadstone.co.uk

Sorry about copying and pasting ,but it won't allow me to post a link.

This is interesting stuff (that I didn’t know), it doesn’t affect me but the OP would do well to see how these factors might affect the figures quoted.

Expotter

I've personally decided not to access my final salary pension early and wait until NRA instead. Assuming there are no health or LTA issues and you have other sources of income, I'd suggest you seriously consider the effect of high inflation, for me it was the main issue. This article will give you some helpful additional information.

"When inflation was creeping up at the start of this year, it was expected to be a transitory phenomenon. However, we now know the expectation is that it will be with us throughout 2022. The Office for Budget Responsibility (OBR) is predicting inflation to peak at 8.7% towards the end of the year and with an average of 7.4% over the 12 months of 2022. The latest inflation figures for February of 6.2% show that we’re not yet even at the peak of the inflation rise.

This will have an impact on benefits. Pensioners may feel wronged as they will see the purchasing power of their annual income being eroded.  Inflation this year will exceed most fixed increases and even those with inflation-linked benefits will often have “caps and collars”. This means that while they’re broadly capturing inflation increases there will be an upper limit, applied annually, to the increase. For instance, the following are common limits:

• GMP earned after 6 April 1988 – inflation capped at 3%
• Other pre-1997 benefits – fixed (often nil increasing, or perhaps 3%)
• Benefits in a contracted-out scheme from 1997– inflation capped at 5% (some benefits earned after 2010 may even be capped at 2.5%, subject to scheme rules)

Some Trustees may want to consider using discretionary increases to assist their members, although this likely places a further strain on scheme finances.  Schemes who have previously used this approach to provide some increases on pre-1997 benefits may need to consider the appropriate balance between pre and post 97 benefits and whether they should be widening their scope.  Ultimately, decisions will be influenced by the funding position of the scheme and the power in the Rules.

For members with deferred benefits, the revaluation is not capped in the same way and so they are likely to see the increases in their revalued benefits. Those deferred members considering early retirement may need to pause for thought though as they are likely to be surrendering a currently higher rate of revaluation for lower annual increases in payment.

Schemes that experience a high number of early retirements may wish to consider the early retirement factors currently in force and make sure they are reflecting the benefits being given up, particularly for those retiring just a year or two early. Trustees could also consider the information they provide to members. It is always difficult to provide clear unambiguous guidance to members, but it may be worth considering a communication to inform them of the potential rate of revaluation later this year compared to the inflation link in payment."

Source: Broadstone.co.uk Rising Inflation by David Brooks 13/04/22

P.S I'm not connected to them in any way, just found it when doing my own research.

Pensions_matter_2

This may not affect the original poster based on their scheme rules etc, but I understand the statutory rules covering mnimum revaluation rates, and minimum increases in pensions once in payment, are not aligned. Under these rules increases to my deferred pension accrued from 1997 up to 2009 is capped at 5% and for pension accrued after that they are capped at 2.5% (and peaks and troughs can be smoothed out over time). However, when my pension goes into payment, pension accrued from 1997 up to 2005 only (not 2009), is subject to the 5% cap on increases in any year, and pension accrued thereafter is capped at 2.5%. This is explained here (but a scheme can provide above this minimum if its in the scheme rules) - https://commonslibrary.parliament.uk/research-briefings/sn05656/

Im not sure how increases might apply in deferment after reaching tne scheme’s normal retirement date - presumably depends on the scheme rules - yet another factor to consider in all this (quite apart from separate rules covering GMPs and pre 1997 accrued pension!). 

 Im no expert on any of this, but it does seem there are many traps here for the unwary deciding when to take their pension in this inflationary environment!
 

Albermarle

Also probably worth taking into account though, that it is expected that inflation will subside again during 2023, although nothing is certain.

xylophone

When you left the Scheme, you may well have been provided with a statement of deferred benefits showing

Pre 88 GMP

Post 88 GMP

Excess.

While in deferment, the pension would have revalued according to the rules of your scheme/statutory requirements - see 

https://www.barnett-waddingham.co.uk/comment-insight/blog/revaluation-for-early-leavers/

noting the information concerning revaluation of GMP/excess.

Until you reach GMP age (65 for a male),  the whole of your pension in payment will increase by whatever index your scheme uses - for example, let's say the scheme used RPI,  your pension was £20,000 per annum and at your increase month, RPI  was 5%.

Your pension then becomes  £21,000.

Let's say that in the following year you reach age 65.

Your pension is now split into its component parts - pre 88 GMP revalued to age 65, post 88 GMP revalued to age 65 and excess.

Let's suppose  £1000 pre 88 GMP, £2000 post 88 GMP  and £18,000 excess.  Let's suppose RPI of 6%.

You will receive no increase on pre 88 GMP, an increase of up to 3% CPI on post 88 GMP and 6% on the excess.

And so on in following years.

AndrewB22

I can see that the inflation adjustments are complicated, but I think they are a secondary effect. The primary difference between taking the pension now, compared with later, is that you will receive £57,000 more pension in total over the period until you are 60, followed by £1,825 less per year - in today’s money - until you die. 

Whether it is better to take the money now depends on how long you live and your health, what you do with the £57k, investment returns, how much you value money now compared with later, how much difference the £1,825 would make to your standard of living in retirement, your tax rates now and in retirement, and perhaps other factors I’ve overlooked. 

In overly simplistic terms, it would take about 30 years for the reduced pension to outweigh the greater amount received between now and age 60. 

I would consider the big picture first, and then whether the inflation factors make much difference seems to me to be secondary. 

Albermarle

As above , regardless of inflation issues, the reduction for taking the pension early is less than 3% pa , which is lower than usual/generous.

Expotter

AndrewB22 said:

I can see that the inflation adjustments are complicated, but I think they are a secondary effect. The primary difference between taking the pension now, compared with later, is that you will receive £57,000 more pension in total over the period until you are 60, followed by £1,825 less per year - in today’s money - until you die. 

Whether it is better to take the money now depends on how long you live and your health, what you do with the £57k, investment returns, how much you value money now compared with later, how much difference the £1,825 would make to your standard of living in retirement, your tax rates now and in retirement, and perhaps other factors I’ve overlooked. 

In overly simplistic terms, it would take about 30 years for the reduced pension to outweigh the greater amount received between now and age 60. 

I would consider the big picture first, and then whether the inflation factors make much difference seems to me to be secondary. 

I agree with you that the decision is entirely personal and dependant on your own circumstances.
Having said that however, knowing that this year's inflation will top 10% and probably will remain high for another year or two (hopefully returning to normal levels after that, although that's not a given either and all our savings might lose their value anyway), I'd rather not see my main source of future income drop by at least 5% in real terms in the first year (potentially more depending on your scheme's caps)  and probably lose another 5% in the second year. If you have the means to wait a year or two and avoid this reduction, I don't see why you wouldn't seriously consider delaying it, to me it's more than a side issue.

AndrewB22

Expotter, I wonder if I am missing something. Won’t that cap on the inflation increase apply whether or not you the pension is taken early?  How would delaying taking the pension avoid it?

I can see that it might if someone is a non deferred member of a scheme and their pension is based on their current final salary AND their salary keeps up with inflation. 

Is it the case that an un-drawn pension goes up with RPI and only a drawn one is capped?  I thought the cap applied either way. If I am wrong, you have a very good point.